There are some folks who believe that oil is on a path to becoming inexorably cheaper, thanks in part to the resurgence of the United States as a growing oil producer, but I think most experts agree with Robert Rapier, the editor of the Energy Strategist, that we’re going to remain in a pretty strong cycle for investing in unconventional exploration and production for many years.

And a big chunk of oil exploration now is happening not just in frontier countries who don’t have established oil production histories, but deep under the ocean in far-offshore areas where old, conventional production techniques just don’t cut it. You’ve heard tales of this before, I’m sure, of the incredible technical achievements made as Brazil (among others) explores for oil under two miles of ocean and thousands of feet more of salt and rock.

It’s hard and expensive to turn these discoveries into production … but countries and companies are motivated to do so all the same. Whether that motivation comes from simple profit potential, with the assumption that oil will remain expensive enough for long enough to justify these 10-20 year capital investments in exploration and infrastructure, or whether they’re simply looking for security and a place at the global bargaining table as folks like OPEC or Russia throw their weight around, well, it doesn’t necessarily matter. The money’s going into exploration, and they’re finding big new fields offshore and gradually bringing them into production, particularly off of South America and Africa (with companies like Byron King’s recently teased African explorer lining up for rigs), and there’s going to be money made as a result.

So who are the companies that Rapier says will make us some money as this “Deepwater Supercycle” continues? Here’s how he teases ’em:

“One is the undisputed ‘Google’ of deepwater search and discovery. Its revolutionary 3D technology scans millions of remote, undersea acres in the hunt for vast new offshore oilfields…

… and the other company drills for oil so expertly, customers are lined up to pay multi-year fees reaching $650,000 per day.

“If you believe nothing else in these confusing times for energy investors, please believe this: Oil is STILL the key to the world’s energy future.

“Not since the 1920s oil strike in the Middle East, when the developed world became dependent on Arabian production, have we seen the NEW FUTURE of oil discovery so starkly revealed.

“Below, I offer up TWO remarkable companies which, taken together, just about claim EXCLUSIVE POSSESSION of the keys to that future. Think of them as the ‘Dynamic Duo’ of deepwater oil discovery and production.

“Own both of these stocks and you’ll be profiting off the world’s unquenchable thirst for oil for years to come.

“Stock #1: It’s nearly impossible to DISCOVER deepwater oil without this high-tech explorer.

“Stock #2: It’s nearly impossible to PRODUCE deepwater oil without this drilling dominator.”

Sound good? Well then, let’s see if we can name those two stocks for you — without, of course, pitching in $600 a year for The Energy Strategist (you can do that if you want to, sure, but don’t do it just to find out their secret stocks — subscribing to anything is a decision better left to the sober moment after you know the stocks they’re teasing).

If you’re curious about The Energy Strategist, by the way, all I can tell you so far is that it used to be edited by Elliott Gue and it generated several interesting ideas during his tenure — we’ve seen mostly good reviews, but they’re a bit dated now (if you’ve ever subscribed, please chime in and tell us what you thought). The last pick teased by Rapier was Anadarko Petroleum, in part because of their latest offshore discovery in Mozambique (though that’s gas, not oil), and the shares are pretty close to where they were when he touted ’em about six weeks ago.

And moving on to those two “Deepwater Supercycle” picks, here are the rest of the clues that we get:

“The First of the Dynamic Duo: ‘The Discoverer’

“… was just recognized by Forbes as a top innovator in oil services. Often working in remote, challenging regions, it’s renowned for inventing cutting-edge technologies enabling clients to discover and analyze oilfields safely and efficiently.

“The company’s unique mix of services is its key selling point. While its competitors offer many of the same basic oil services, my pick stands out for its technological innovations and the strength of its exploration capabilities….

“… my recommendation has invented a way to measure and analyze target fields before a company commits to the enormous investment needed to get the oil out of the ground….

“Like an MRI for the Ocean Floor

Always innovating, the company recently announced the launch of its breakthrough IsoMetrix marine technology—the first true 3D wavefield measurement.

Using calibrated, micro-electro-mechanical systems (MEMS) technology, it produces the most accurate images of the ocean-floor subsurface ever recorded.

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“According to a top executive, the leap forward in imaging ‘… is as profound as was the move from X-rays to full 3D scans in the world of medicine….’

“… the stock as I write is trading at only 15 times estimated earnings for this year. A company growing this fast, with its own unique cutting-edge technology and with customers lined up for miles, should be trading at a P/E of 25. It’s a flat-out bargain right now.”

Toss that in the maw of the Mighty, Mighty Thinkolator and we learn that this is … Schlumberger (SLB), which is probably a name that most of you know. Schlumberger is the largest pure play oil services company in the world, by a pretty wide margin, and with a market cap of about $100 billion they’re one of the larger companies in the world, period.

And they do indeed offer an integrated suite of oilfield services, touching pretty much every aspect of searching for, drilling, defining, producing, managing and stimulating oil and gas wells for energy companies around the world — they particularly focus on selling integrated “full package” services to the huge national oil companies that don’t want to give up ownership to someone like ExxonMobil, but do need production expertise (like Venezuela, a substantial customer — so that’s one potential risk, but they’re providing services instead of owning assets, so expropriation is not as big a deal as slow payment of bills). They’re a bit more international than their large US competitors like Baker Hughes (BHI) or Halliburton (HAL), but they do depend on North America for a good 30-40% of revenue.

They do offer that new technology for imaging the undersea resources, though I assume it’s probably not a material contributor to profits just yet, and they are pushing further into offshore services where margins are higher (especially lately, with a lot of onshore natural gas exploration on the slow track until nat gas prices improve). And if you take a quick look at SLB’s basic financials it’s hard to find much to quibble with — they trade at about 13-15 times next year’s earnings (depending on whose guess you use), so they’re valued at a bit of a premium compared to HAL or BHI … but they also have significantly better revenue growth and profit margins.

SLB does pay a small dividend and they have raised the dividend several times in recent years, but they do not have that unblemished history of steady annual increases that most dividend growth investors like to see — so there’s a decent dividend, but don’t necessarily count on substantial income or compounding anytime soon. Like their competitors, they have a great balance sheet with plenty of cash and easily manageable debt.

So … I don’t know what else to tell you about Schlumberger … they’re the industry leader, I like their “bolt on” strategy of acquiring companies with strong technology or software that they can add to their services (including new imaging technologies, and their recent acquisition of a subsea services company that they’re rolling into a joint venture with Cameron), and they’re probably not a screaming bargain but the stock is reasonably priced. Morningstar pegs them with a “fair value” of over $80 but doesn’t want to buy until it’s down to the mid-$50s (it’s around $75 now), Trefis does a “sum of the parts” analysis and gives them a value of $88. Analysts think they’re going to continue growing at 15-20% a year, which is really pretty remarkable for a $100 billion company, so if those targets are feasible it’s easy enough to buy it here in the mid-$70s.

I’ve never owned the stock myself, and now that I’m writing about it for you today I won’t be trading it in the near future … but with the shares down a bit on soft North American gas drilling my first thought when I saw the ticker pop up out of the Thinkolator was, “hmmm, this might be a reasonable one to use for a covered call strategy.” Their earnings announcement is scheduled for April 19, so that’s the next likely thing to move the stock … though of course, with oil services names any big moves in the price of oil or gas tend to trickle through and impact the stock price. As do accidents and spills, if you’re looking for black swans to worry about.

How about the next pick teased, the second half of Rapier’s “Dynamic Duo?” Here are our clues:

“‘The Producer’ … has long been my favorite way to capitalize on two key realities: (1) 70% of oil discoveries over the past two years have been offshore, and (2) most of the big new fields are in the deep.

“So it’s no surprise that rates are rising fast for ultra-deepwater drillers, the intrepid, indispensable outfits bringing the oil to the surface. My top drilling recommendation owns the best fleet of rigs and drillships in the business—some capable of drilling 35,000 feet under the sea. It just signed a five-year deal paying $635,000 per ship per day.

“It also passes along most of that cash straight to shareholders in the form of impressively high dividends.”

Sound familiar? Yes, I think this is our old favorite driller, too — and one Rapier and his predecessor Gue have teased several times before … but let’s just double check:

“… it’s impeccably managed and it owns the most advanced fleet of deepwater and ultra-deepwater rigs in the business. No competitor comes close.

“At a time when there’s a shortage of such rigs and ships needed to drill and produce oil from these new finds, my top pick owns a modern fleet of 24 deepwater rigs, including 16 operating vessels and another 8 units slated for delivery….

“These drilling maestros do deals that would make Donald Trump envious.

“That’s because they have the leverage to boost day rates as they see fit. With their rigs locked into multiyear contracts at fixed day rates, they boast a stable source of cash flow to support their ample dividend—with plenty of room to raise the payout in coming quarters….

“My sources tell me the company is close to signing a contract with a major producer covering three of its units still under construction. This deal is worth almost $4 billion, equivalent to a day rate of $575,000.

“On the heels of that deal, my top pick’s crack team just announced it will lease a deepwater ‘harsh-environment’ rig to a Canadian oil company for five years of drilling offshore Greenland. The deal is sweet: Reports suggest the day rate over the contract period will be around $650,000.”

OK, so yes — we don’t even have to turn the Thinkolator back on to tell you that this is Seadrill (SDRL). Though the rig count, according to Seadrill’s website, is now at 20 operating deepwater rigs and seven on order (that tally includes both drillships and semisubmersible rigs, both of which are “floaters” — for shallower water “jackups” are used that actually rest on the ocean floor, and though the jackup market got saturated a few years ago and some older rigs where mothballed, particularly in the Gulf of Mexico, Seadrill has also been investing in high-spec jackups of late). I don’t know if you’d call them the “Google” of deepwater drilling — they do have the largest fleet of the very best, highest capacity rigs, but it’s not nearly a monopoly … there are both large and small rig owners around the world investing in new equipment, including huge players like Transocean (RIG), which is roughly the same size as SDRL, and Seadrill does not control a majority of the globe’s deepwater rigs.

Seadrill is a big dividend payer, which is what motivates most SDRL shareholders right now — the current yield is about 9%, and they aggressively try to grow the dividend or tack on special dividends as often as they can. There hasn’t been a dividend for a few months because they doubled up and paid the 4Q dividend in December when everyone was worried about dividend tax changes, but the next payment should be expected toward the end of May. The company has said that a continuing payout of 85 cents should be expected for at least the first quarter, and given their focus on continuing to improve the dividend I would presume that we should consider that $3.40/year rate to be the floor going forward, so I’m quite comfortable owning Seadrill with a 9% dividend and letting my dividends reinvest.

It may well be a bumpy ride, though — Seadrill is indeed run by dealmakers, particularly controlling investor John Fredriksen, and while I enjoy the deals (spinoffs, sale/leasebacks, acquisitions, dropdowns to their captive SDLP master limited partnership) because they tend to improve cash flow and send cash to investors’ pockets, they also do generally bring on more debt and dilute the asset base and increase the volatility. That’s the tradeoff for Seadrill — they have long-term contracts to back up the huge dividends they pay, and to support the heavy leverage they use to pay for their newbuilding program, but they are not in the business of having a big cash cushion or trading on their book value or the value of their rigs — they’re in the business of ordering hugely expensive rigs when other people are afraid to commit capital, and then reaping the rewards of the high dayrates those rigs bring in and spitting out as much of that cash flow as possible to shareholders.

The stock has been pretty soft this year largely due to some weak performance last quarter and warnings about early this year, and also due to the sale of their tender rig division that will cut into cashflow for a few months until new rigs generate more money. The poor earnings were mostly from downtime that hit most of the industry as blowout preventers had to be worked on, along with some other maintenance, but that should now be done and I expect this year will be another solid one as a large order of newbuild jackups and three new deepwater rigs will hit the water over the next few quarters and start spitting out cash.

As I said a few months ago, I wouldn’t want to go “all in” in the high $30s, since there tend to be opportunities when investors panic or worry about leverage or oil prices, and Seadrill usually gets cheaper during those episodes … and there will probably be another crash in this business at some point in the next decade from overbuilding or another financial crisis, but I don’t see tough times coming for Seadrill in the near future and I wouldn’t be worried about nibbling at these prices. I’m quite happy to keep reinvesting my dividends for now.

So those are the two picks being teased by Rapier as the “superstars” of the currently booming deepwater business — whaddya think? Interested in either of them, or in the many other companies who benefit from offshore oil? Let us know with a comment below.